What happened
Shares of Telefonaktiebolaget LM Ericsson (ERIC 3.69%), or simply Ericsson, were down 14% today as of 12:25 p.m. ET. The Swedish networking and telecom equipment company said it may have inadvertently funded the Islamic State (ISIS) in Iraq in 2019. This announcement comes about a week after Ericsson said it had received inquiries from media outlets regarding its sales in Iraq, and that it would be reviewing a previous internal investigation it conducted in 2019 and would compare findings with that presented to it from external sources.
Image source: Getty Images.
So what
Turns out that upon review, Ericsson's conduct in Iraq in 2019 might have inadvertently funded ISIS. According to the company's press release on Tuesday, it reads in part:
The investigation ... found serious breaches of compliance rules and the Code of Business Ethics. It identified evidence of corruption-related misconduct, including: Making a monetary donation without a clear beneficiary; paying a supplier for work without a defined scope and documentation; using suppliers to make cash payments; funding inappropriate travel and expenses; and improper use of sales agents and consultants.
Ericsson said it also found evidence of payments to sales intermediaries that used "alternate transport routes" during a period of heightened terrorist activity. During that time, ISIS and others controlled some transport routes in Iraq.
Now what
The scope of the funding that might have ended up with ISIS and what Ericsson can do to remediate the issue remain to be seen. The company has been forthcoming with information since news of the 2019 scandal broke, so stay tuned to Ericcson's investor relations page for more details regarding the path forward. I'd expect some government regulatory intervention as well given Ericsson's admission.
Outside of this event, Ericsson stock was starting to show signs of growth again as 5G network deployment picks up pace around the globe. The company is also in the process of acquiring communications software platform Vonage to supplement its networking equipment and management operation. Even with the addition of Vonage, though, this is no high-growth investment in the 5G race. But if you're looking for investment income, Ericsson might still be worth considering. Just expect some heightened volatility for now as it sorts through the misconduct in Iraq from a few years ago.
